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unit 2 summary.docx

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Administrative Studies
ADMS 1010
All Professors

GDP Income and Expenditure GDP as the market value of all the final goods and services produced within a country in a given time period 1 Only those items that are traded in markets are included in GDP2 Only final goods or servicesthose produced for final users and not as a component of another good or serviceare included in the GDP 3 The good or service must be produced within a country and during a specified period of time monthly quarterly or yearlyThe word produced is used to make clear that sales are not important GDP measures the value of total production as well as total income and total expenditure direct link between productivity and standards of living Gross means before subtracting depreciation or capital consumptionNet means after subtracting depreciation or capital consumptionMeasuring GDP Because the circular flow shows that total expenditure on final goods and services equals total income countries use expenditure and income approaches to measure GDPThe expenditure approach CIGNX Adding up the consumption expenditure investment expenditure government expenditure on goods and services and net exports of goods and services exportsimports The income approach Adding up wage earnings for labour interest earnings for capital rent earnings for land and profit earnings for entrepreneurship Total income is net domestic product at factor cost To convert it to gross domestic product at market prices we must add the depreciation of capital and add indirect taxes minus subsidiesTheoretically the expenditure approach must balance the income approach because whatever someone spends must ultimately end up as income to someone else Nominal GDP versus Real GDP The GDP variable described so far was based on the value of final goods and services produced in a given year and valued at the prevailing prices This is called nominal GDP Changes in nominal GDP over time changes in the amount of final goods and services OR changes in their prices If the increase in nominal GDP is due to an increase in prices then the standard of living will not improve use real GDP rather than nominal GDP to measure the standard of living
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